Financial Times

WASHINGTON – Building on recent strong growth, countries in South Asia can dramatically reduce poverty by embracing policies aimed at increasing investment and productivity, and improving the quality of labor, while addressing pervasive income inequalities and poor service delivery, according to Economic Growth in South Asia, a World Bank report released last week.

The report finds that while countries in the region are growing rapidly, evidence shows that expansion, due to its uneven nature, is deepening income inequality and may be hard to sustain in the longer term if the key constraints are not addressed. “South Asia’s decade-long economic expansion has raised the possibility that the sub-continent could eliminate poverty in our lifetime,” says Shantayanan Devarajan, co-author of the report and World Bank Chief Economist for the South Asia region. “But to realize this dream, South Asians must create the conditions and incentives necessary to sustain and accelerate growth that benefits all.

The economic well-being of several hundred millions of people depends on it.”
A striking feature of the report is analysis showing that South Asian countries could see single-digit poverty rates in a decade if economic growth accelerates to 10 percent a year until 2015. This means the number of people living in poverty could go down by two-thirds in less than ten years.

Looking back at the remarkable economic performance of the past decade, the report suggests South Asian countries should aspire to this goal and emulate the East Asian growth rates of 7 to 10 percent that lifted millions of people out of poverty in relatively few years.

Impressive progress so far

Bangladesh, India, and Pakistan have all grown at over 5 percent per year on average during the last five years. Growth in both Pakistan and India topped 8 percent last year. Forecasts put South Asian economies on a steady path of expansion this year.Economic growth has already contributed to an impressive reduction in poverty. In the last decade, poverty in Bangladesh, India, and Nepal fell by 9, 10 and 11 percent respectively; in Sri Lanka it fell by 6 percent. Only in Pakistan did poverty increase by 8 percentage points due to economic stagnation throughout the 1990s. The most recent evidence (2004-5 survey), however, suggests that with the resumption of high growth, poverty is again declining rapidly in Pakistan.

Translating growth into poverty reduction

But much remains to be done to achieve accelerated growth rates that increase economic prosperity across the board, the report says. First, economic growth in the past decade has resulted in growing income inequality which may act as a constraint to higher growth in the future.

Second, while conflict, corruption, and high fiscal deficits may not have constrained growth in the past, their persistence may become binding in the future.

Faster growth must also be more equitably shared, the report says.
With nearly 400 million poor people, poverty in South Asia is not just endemic, but increasingly concentrated in lagging regions. Not only are these regions poorer, but their growth rates are substantially slower than the better-off regions.

The phrase “two Indias” that describes the great divide between those who benefit from Indian economic growth and the 300 million poor people being left behind is a vivid example of the current challenge, repeated across South Asian.

Also key to reaching higher growth will be addressing rural and urban infrastructure deficits. The report says around $25 billion annually is needed for new infrastructure in the region.

“While the policy agenda appears daunting, the dynamism and openness that characterizes South Asia today makes us optimistic that some, if not all, of these challenges can be met and the region could be substantially free of poverty in a few decades,” says Ijaz Nabi, report co-author and Sector Manager for Economic Policy for the World Bank’s South Asia region.

A good way to measure South Asia's quality of growth and its potential impact on economic prosperity is to compare key economic indicators with those of East Asian countries growing at a similar pace.

Even though recent increases in South Asian per capita incomes now match those in East Asia, data shows that East Asian levels of prosperity are associated with much higher Foreign Direct Investment (FDI), skills, infrastructure, and perceptions of the business environment than those currently present in South Asia. For example, it takes 89 days to start a business in India, compared to 41 in China.

Although manufacturing in South Asia has registered healthy growth in recent years, it needs to grow much faster for the region to catch up with their eastern neighbours.

Between 1968 and 2001, the share of manufacturing value added in GPD increased 400 percent in Malaysia, 300 percent in Thailand, and over 200 percent in Korea compared to an increase of only 20 in India and 30 percent in Pakistan.

In 2003, East Asia attracted US$59 billion in FDI; China alone attracted US$53.5 billion. In the same year, FDI inflow to South Asia was US$5.1 billion, one-tenth East Asia’s, with India receiving US$4.3 billion.

To catch up with East Asia, the report says, South Asian economies must save and invest a lot more. They must also increase the efficiency of investment and ensure that higher economic growth drives faster poverty reduction.

The report further cites country-specific challenges that policy-makers would need to address to accelerate growth.

These include reducing fiscal deficits and public debt in India; strengthening governance in Bangladesh; deepening human capital in Pakistan, and addressing civil conflict in Sri Lanka and Nepal.